Western Digital 2006 Annual Report Download - page 28

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demand during the winter holiday season. If we do not properly adjust our supply to new demand cycles such as this, we
risk having excess inventory during periods of low demand and insufficient inventory during periods of high demand,
therefore harming our operating results.
If we do not successfully continue to expand into the mobile market, our business may suffer.
We began shipping 2.5-inch form factor hard drives for the mobile market during calendar year 2004. Although
many of our customers who purchase 3.5-inch form factor hard drives also purchase the 2.5-inch form factor drives, the
markets are characterized by some different competitors and different overall requirements. If we are unable to adapt to
these differences and meet the new requirements, we would have a competitive disadvantage to companies that are
successful in this regard, and our business and financial results could suffer. In addition, if we continue to incur significant
costs in manufacturing and selling the 2.5-inch hard drives, and if we are unable to recover those costs from sales of the
products, then we may not be able to compete successfully in this market and our operating results may suffer.
Selling to the retail market is an important part of our business, and if we fail to maintain and grow our market share or
gain market acceptance of our branded products, our operating results could suffer.
We sell our branded products directly to a select group of major retailers, for example, computer superstores and
CE stores, and authorize sales through distributors to other retailers and online resellers. Our current retail customer base
is primarily in the United States, Canada and Europe. We are facing increased competition from other companies for shelf
space at major retailers, which could result in lower revenues. If we fail to successfully maintain a customer preference for
Western Digital brand products or fail to successfully expand into multiple channels, our operating results may be
adversely affected. In certain markets, we are trying to grow market share, and in the process may face strong competition,
which could result in lower gross margins. We will continue to introduce new products in the retail market that
incorporate our disk drives. There can be no assurance that these products gain market acceptance, and if they do not, our
operating results could suffer.
Loss of market share with or by a key customer could harm our operating results.
A majority of our revenue comes from about a dozen customers. For example, during 2006, one customer, Dell,
accounted for more than 12% of our revenue, and sales to our top 10 customers, including Dell, accounted for 47% of
revenue. These customers have a variety of suppliers to choose from and therefore can make substantial demands on us,
including demands on product pricing and on contractual terms, which often results in the allocation of risk to us as the
supplier. Even if we successfully qualify a product with a customer, the customer generally is not obligated to purchase
any minimum volume of products from us and may be able to cancel an order or terminate its relationship with us at any
time. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If
we lose a key customer, if any of our key customers reduce their orders of our products or require us to reduce our prices
before we are able to reduce costs, if a customer is acquired by one of our competitors or if a key customer suffers financial
hardship then our operating results would likely be harmed. In addition, if customer pressures require us to reduce our
pricing such that our gross margins are diminished, we could decide not to sell our products to a particular customer,
which could result in a decrease in our revenue.
We may be unable to retain our key personnel and skilled employees.
Our success depends upon the continued contributions of our key personnel and skilled employees, many of whom
would be extremely difficult to replace. Worldwide competition for skilled employees in the hard drive industry is
intense. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key
personnel or skilled employees who have received equity compensation. If we are unable to retain our existing key
personnel or skilled employees, or hire and integrate new key personnel or skilled employees, or if we fail to implement a
succession plan to prepare qualified individuals to join us upon the departure of a member of our key personnel, our
operating results would likely be harmed.
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